Economic history of Brazil

By the mid-16th century, Portugal had succeeded in establishing a sugar economy in parts of the colony's northeastern coast.[3] Sugar production, the first large-scale colonial agricultural enterprise, was made possible by a series of favorable conditions.[3] Portugal had the agricultural and manufacturing know-how from its Atlantic islands and manufactured its own equipment for extracting sugar from sugarcane.[3] Furthermore, being involved in the African slave trade, it had access to the necessary manpower.[3] Finally, Portugal relied on the commercial skills of the Dutch and financing from Holland to enable a rapid penetration of sugar in Europe's markets.[3]

Until the early seventeenth century, the Portuguese and the Dutch held a virtual monopoly on sugar exports to Europe.[3] However, between 1580 and 1640 Portugal was incorporated into Spain, a country at war with Holland.[3] The Dutch occupied Brazil's sugar area in the Northeast from 1630 to 1654, establishing direct control of the world's sugar supply.[3] When the Dutch were driven out in 1654, they had acquired the technical and organizational know-how for sugar production.[3] Their involvement in the expansion of sugar in the Caribbean contributed to the downfall of the Portuguese monopoly.[3]

The Caribbean sugar boom brought about a steady decline in world sugar prices.[3] Unable to compete, Brazilian sugar exports, which had peaked by the mid-seventeenth century, declined sharply.[3] Between the fourth quarter of the seventeenth century and the early eighteenth century, Portugal had difficulties in maintaining its American colony.[3] The downfall of sugar revealed a fragile colonial economy, which had no commodity to replace sugar.[3] Paradoxically, however, the period of stagnation induced the settlement of substantial portions of the colony's territory.[3] With the decline of sugar, the cattle sector, which had evolved to supply the sugar economy with animals for transport, meat, and hides, assimilated part of the resources made idle, becoming a subsistence economy.[3] Because of extensive cattle production methods, large areas in the colony's interior were settled.[3]

Realizing that it could maintain Brazil only if precious minerals were discovered, Portugal increased its exploratory efforts in the late seventeenth century.[3] As a result, early in the eighteenth century gold and other precious minerals were found.[3] The largest concentration of this gold was in the Southeastern Highlands, mainly in what is now Minas Gerais State.[3]

Despite Brazil's economic troubles, the early nineteenth century was a period of change.[4] First, the Napoleonic Wars forced the Portuguese royal family to flee to Portugal's colony of Brazil in 1808, and for a short period the colony became the seat of the Portuguese empire.[4] Moreover, in 1808 Britain persuaded Portugal to open the colony to trade with the rest of the world, and Portugal rescinded its prohibition against manufacturing (Strangford Treaty).[4] These events paved the way for Brazil's independence on September 7, 1822.[4] Indeed, during this period, the Portuguese royal family and the noblemen who had established themselves in the territory, started many reforms which developed the educational, cultural and economical sectors of Brazil. By 1814, the Portuguese and their allies had defeated Napoleon's armies in the Peninsular War, after had been victorious in the war against the French invasion of Portugal by 1811. However, the King of Portugal remained in Brazil until the Liberal Revolution of 1820, which started in Porto, demanded his return to Lisbon in 1821, but his son Pedro remained in Rio de Janeiro as regent and governor of the newly created Kingdom of Brazil, a Portuguese possession within the new United Kingdom of Portugal, Brazil and the Algarves (1815–22).

Brazil's early years as an independent nation were extremely difficult.[4] 1820-1872 for Brazil was a combination of stagnation and regional diversity. According to Leff (1982, 1997), from the time of Brazil's independence in 1822, its rate of GDP growth failed to outpace its population growth. Hence, while the population did expand at a rapid pace (nearly 2 per cent per annum), the country's efforts to improve its performance in per capita terms were largely frustrating until the start of the twentieth century. This protracted and very difficult period of stagnation was, however, the net results of widely varying trends in different regions of the country. The north-eastern part of Brazil, which was a platform for sugar and cotton exports and which accounted for 57 per cent of the country's exports at the start of this period, saw a steady decline in its external sales. In 1866–70, these crops represented just 30 per cent of exports, while the share of coffee exports-the leading product in the south-eastern portion of the country-jumped from 26 to 47 per cent.

Leff (1982, 1997) explains the decline experiences in the north-east in terms of Dutch disease. As coffee exports came to play a greater role in the foreign exchange market, the real exchange rate increasingly reflected the importance of that product, which had a negative impact on the less competitive regions, such as the north-east. It was neither possible to restructure the sugar industry very quickly, nor easy to promote large-scale inter-regional migration flows, although a large number of slaves did move from the north-east to the south-east. Throughout this period, the expansion of the coffee industry was not hindered by any increase in labor costs, since up to 1852 (end of the slave trade), wages were depressed by the presence of slave labor and later by subsidized immigration flows, particularly from Italy (Leff 1997:5). This strengthened the existing pattern in Brazil: an export sector that generated high levels of earnings alongside a large sector that catered to the domestic market and a large subsistence economy, both with very low levels of productivity, with the outcome being low per capita income levels but a high export coefficient relative to the other Latin American economies. [5] Exports remained low, and the domestic economy was depressed.[4] The only segment that expanded was the subsistence economy.[4] Resources (land, slaves, and transport animals) made idle by the decline of the export economy were absorbed into mostly self-consumption activities.[4]

As a result of the problems associated with import substitution industrialization and the reforms introduced by the military regime after March 1964, the Brazilian economy lost much of its dynamism between 1962 and 1967.[12] The average rate of growth of GDP in the period declined to 4.0 percent and that of industry to 3.9 percent.[12] In part, stagnation resulted from distortions caused by the strategy.[12] Moreover, political troubles negatively affected expectations and precluded the formation of a coalition to back the introduction of tough measures to control inflation and the balance of payments crisis. Political troubles also hindered the removal of obstacles to growth.[12]

The 1964 coup dealt with the political obstacles by forcefully restraining opposition to the military agenda of change.[12] With the objective of transforming Brazil into a modern capitalist economy and a military power, the regime implemented a series of reforms aimed at reducing inflation, at removing some of the distortions of import substitution industrialization, and at modernizing capital markets.[12] The regime gradually introduced incentives to direct investment, domestic and foreign, and tackled balance of payments problems by reforming and simplifying the foreign-exchange system.[12] In addition, the regime introduced a mechanism of periodic devaluations of the cruzeiro, taking into account inflation.[12] Finally, the military government adopted measures to attract foreign capital and to promote exports.[12] It took steps to expand public investment to improve the country's infrastructure and later to develop state-owned basic industries.[12]

The post-1964 reforms and other policies of the military government, together with the state of the world economy, created conditions for very rapid growth between 1968 and 1973.[13] In that period, the average annual rate of growth of GDP jumped to 11.1%, led by industry with a 13.1% average.[13] Within industry, the leading sectors were consumer durables, transportation equipment, and basic industries, such as steel, cement, and electricity generation.[13]

As a result of the post-1964 policies, external trade expanded substantially faster than the economy as a whole.[13] There was a significant growth in exports, especially manufactured goods, but also commodities.[13] Yet, imports grew considerably faster, rapidly increasing the trade deficit.[13] This did not present a problem, however, because massive inflows of capital resulted in balance of payments surpluses.[13]

The external sector contributed substantially to high growth rates, as did the rapid expansion of investment, including a growing share of public investment and investment by state-controlled enterprises.[13] In addition, increased demand for automobiles, durable and luxury goods, and housing resulted from a rapid growth in income for the upper income strata and from credit plans created for consumers and home-buyers by the capital-market reforms.[13]

The industrial sector generally experienced not only rapid growth but also considerable modernization.[13] As a result, imports of capital goods and basic and semi-processed inputs increased sharply.[13] The share of intermediate goods imports in total imports increased from 31.0% in the 1960–62 period to 42.7% in 1972, and that of capital goods, from 29.0 to 42.2%.[13] The total value of imports rose from US$1.3 billion to US$4.4 billion.[13]

A comparison of the 1960 and the 1975 shares of the various industrial sectors in total value added by industry reveals a continuation in the relative decline of nondurable industries, notably textiles, food products, and beverages, and an increase in machinery, from 3.2 to 10.3%.[13] The relative shares of most of the remaining industries, however, did not change significantly in the period.[13]

As a result of the period's outward-looking development strategy, Brazil's industrial exports increased from US$1.4 billion in 1963 to US$6.2 billion in 1973.[13] The composition of exports shows that whereas in 1963 processed and semi-processed manufactured exports accounted for only 5% of total exports, in 1974 their share had reached 29%.[13]

In the 1968–73 period, personal income became more concentrated and regional disparities became greater.[13] Industrial expansion took place more vigorously in the Center-South Region, which had benefited most from the import substitution industrialization strategy.[13] Its per-capita income considerably exceeded the national average, its infrastructure was more developed, and it had an adequate supply of skilled workers and professionals.[13] The region was therefore able to take advantage of the opportunities and incentives offered by the military regime.[13] Although a special regional development strategy existed for the Northeast, it promoted a distorted industrialization that benefited only a few of that region's large cities; the Northeast's linkages with the Center-South were stronger than its linkages within the region.[13] The combination of a harsh climate, a highly concentrated land-tenure system, and an elite that consistently resisted meaningful change prevented the Northeast from developing effectively.[13]

Economic activity in Brazil (1977)

Brazil suffered drastic reductions in its terms of trade as a result of the 1973 oil shock.[14] In the early 1970s, the performance of the export sector was undermined by an overvalued currency.[14] With the trade balance under pressure, the oil shock led to a sharply higher import bill.[14] Brazil opted to continue a high-growth policy.[14] Furthermore, it adopted renewed strategies of import substitution industrialization and of economic diversification.[14] In the mid-1970s, the regime began implementing a development plan aimed at increasing self-sufficiency in many sectors and creating new comparative advantages.[14] Its main components were to promote import substitution of basic industrial inputs (steel, aluminium, fertilizers, petrochemicals), to make large investments in the expansion of the economic infrastructure, and to promote exports.[14]

This strategy was effective in promoting growth, but it also raised Brazil's import requirements markedly, increasing the already large current-account deficit.[14] The current account was financed by running up the foreign debt.[14] The expectation was that the combined effects of import substitution industrialization and export expansion eventually would bring about growing trade surpluses, allowing the service and repayment of the foreign debt.[14]

Thus, despite the world recession resulting from other countries' adjustments to the oil shock, Brazil was able to maintain a high growth rate.[14] Between 1974 and 1980, the average annual rate of growth of real GDP reached 6.9 percent and that of industry, 7.2 percent.[14] However, the current-account deficit increased from US$1.7 billion in 1973 to US$12.8 billion in 1980.[14] The foreign debt rose from US$6.4 billion in 1963 to nearly US$54 billion in 1980.[14]

Brazil was able to raise its foreign debt because, at the time, the international financial system was awash in petrodollars and was eagerly offering low-interest loans.[14] By the end of the 1970s, however, the foreign debt had reached high levels.[14] Additionally, the marked increase of international interest rates raised the debt service, forcing the country to borrow more only to meet interest payments.[14] Productive capacity, exports, and the substitution of imports in various sectors expanded and became more diversified.[14] However, the expected impacts on Brazil's current account were not to materialize until the mid-1980s.[14]

Another feature of the 1974–80 period was an acceleration of inflation. Between 1968 and 1974, the rate of inflation had declined steadily, but afterward the trend was reversed.[14] From 16.2 percent a year in 1973, the growth rate of the general price index increased to 110.2 percent a year by 1980.[14]

In 1979 a second oil shock nearly doubled the price of imported oil to Brazil and lowered the terms of trade further.[16] The rise in world interest rates sharply increased Brazil's balance of payments problem and the size of the foreign debt.[16] Nevertheless, the government continued borrowing, mainly to face an increasing debt burden, while it tried vainly to maintain the high-growth strategy.[16] At the beginning of the 1980s, however, the foreign-debt problem became acute, leading to the introduction of a program to generate growing trade surpluses in order to service the foreign debt.[16] The program was achieved by reducing growth and, with it, imports, and by expanding exports.[16] As a result, in 1981 real GDP declined by 4.4 percent.[16] The 1982 Mexican debt crisis ended Brazil's access to international financial markets, increasing the pressure for economic adjustment.[16]

Some unorthodox economists like Stephen Kanitz attribute the debt crisis not to the high Brazilian level of indebtedness nor to the disorganization of the country's economy. They say that the cause of the crisis was rather a minor error in the U.S. government banking regulations which forbids its banks from lending over ten times the amount of their capital, a regulation that, when the inflation eroded their lending limits, forced them to cut the access of underdeveloped countries to international savings.[17]

The austerity program imposed by the International Monetary Fund in late 1979 continued until 1984, but substantial trade surpluses were obtained only from 1983 on, largely as a delayed result of the import substitution industrialization programs of the 1970s and the reduction in imports brought about by economic decline.[16] The austerity program enabled Brazil to meet interest payments on the debt, but at the price of economic decline and increasing inflation.[16]

Inflation accelerated as a result of a combination of factors: the exchange-rate devaluations of the austerity program, a growing public deficit, and an increasing indexation of financial balances, wages, and other values for inflation.[16] The first two factors are classical causes of inflation; the last became an important mechanism for propagating hyperinflation and in preventing the usual instruments of inflation control from operating.[16]

By the mid-1980s, domestic debt nearly displaced foreign debt as Brazil's main economic problem.[16] During the high-growth 1970s, a significant portion of foreign borrowing had been by state enterprises, which were the main actors in the import substitution industrialization strategy.[16] Initially, they borrowed to finance their investments.[16] However, toward the end of the decade, with the acute shortage of foreign exchange, the government forced state enterprises to borrow unnecessarily, increasing their indebtedness markedly.[16] Their situation worsened with the sharp rise in international interest rates in the late 1970s, the devaluations of the austerity program, and the decreasing real prices of goods and services provided by the public enterprises stemming from price controls.[16] Because the state enterprises were not allowed to go bankrupt, their debt burden was transferred gradually to the government, further increasing the public debt.[16] This, and a growing disorganization of the public sector, transformed the public debt into a major economic problem.[16] By the mid-1980s, the financial burden stemming from the debt was contributing decisively to its rapid expansion.[16]

During the second half of the 1980s, it became increasingly clear that a large-scale fiscal reform, one that enabled noninflationary financing of the public sector, was needed not only to control inflation but also to restore the public sector's capacity to invest.[18] Both were essential for an economic recovery.[18] However, political obstacles prevented the reform from materializing.[18] And, because inflation had become the most visible symptom of the public-sector disequilibrium, there were several attempts to bring inflation under control through what came to be known as "heterodox economic shocks".[18] The period saw three such shocks: the Cruzado Plan (1986), the Bresser Plan (1987), and the Summer Plan (1989).[18]

The objective of the Cruzado Plan was to eliminate inflation with a dramatic blow.[18] Between 1980 and 1985, the rise in the CPI had escalated from 86.3% to 248.5% annually.[18] Early in 1986, the situation became desperate, prodding the implementation of the plan.[18] Its main measures were a general price freeze, a wage readjustment and freeze, readjustment and freeze on rents and mortgage payments, a ban on indexation, and a freeze on the exchange rate.[18]

The plan's immediate results were spectacular: the monthly rate of inflation fell close to zero, economic growth surged upward, and the foreign accounts remained under control.[18] However, by the end of 1986 the plan was in trouble.[18] The wage adjustments were too large, increasing aggregate demand excessively and creating inflationary pressures.[18] Moreover, the price freeze was maintained for too long, creating distortions and leading to shortages of a growing number of products.[18] Inflation accelerated again and there was a return of indexation.[18] The country imposed a moratorium on its foreign debt service on February 20, 1987.[19]

The two other stabilization plans amounted to renewed attempts at bringing inflation down from very high levels.[18] It was soon clear that without a thorough reform of the public sector, controlling inflation would be impossible.[18] Both plans introduced a price freeze and eliminated indexation, but there were differences between them, and with the Cruzado Plan.[18] Neither was able to address the public-sector disequilibrium effectively.[18] The objective of the Summer Plan, for instance, was mainly to avoid hyperinflation in an election year.[18]

In fact, the public-sector disequilibrium became virtually locked in as a result of the 1988 constitution, which created advantages for various segments of society without indicating how these advantages would be paid for.[18] Moreover, it transferred large portions of the tax revenues from the federal government to state and municipal governments, without requiring them to provide additional public services.[18] With less revenue and more responsibility, the federal accounts experienced growing deficits.[18] In addition, several subsidies were locked into the legislation.[18] These factors and the financial burden of the public debt meant growing problems of public finance.[18]

The 1980s ended with high and accelerating inflation and a stagnant economy, which never recovered after the demise of the Cruzado Plan.[18] The public debt was enormous, and the government was required to pay very high interest rates to persuade the public to continue to buy government debt instruments.[18]

Another major obstacle to economic growth during the 1980s was Brazil's protectionist policy from 1984 to 1992 of severely restricting imports of foreign computer hardware and software to protect and nurture Brazil's domestic computer industry (which was but one manifestation of the country's long-term policy of import substitution industrialization).[20] The policy was so strict that the government regularly seized personal computers from foreign businesspersons who were visiting for ordinary business trips, because of the fear that foreign visitors were smuggling PCs to domestic users. Although this policy was superficially successful, the federal government failed to fund the basic research that was essential to the success of computer industries in the United States, Europe, and Japan. Brazilian computer users in this era frequently paid two or three times the international market price for unreliable, poorly designed domestic clones of foreign computer designs,[20] since domestic manufacturers lacked the well-trained engineers and basic research necessary to develop their own indigenous innovations, let alone build brilliant new designs from scratch. By the time the policy was rescinded in 1991, it had failed in the sense that Brazil's domestic computer manufacturers were still unable to make advanced computer products suitable for export to other countries,[21] and had severely limited the modernization and computerization of Brazil's economy.[22] By that point in time, computer usage in most economic sectors in most developed countries was exceeding 90 percent. In Brazil, computer usage by businesses was around 12 percent.[22] Even worse, Brazilian schools were falling far behind in preparing students to use computers when they entered the workforce; only 0.5 percent of Brazilian classrooms had computers.[22] In other words, by 1990, the electronic office was still science fiction as far as most Brazilians were concerned and they were still doing business exclusively through labor-intensive paper-based processes. This meant their productivity was far lower than people in countries who had already been using computers for one or two decades, and who had, for example, already made the transition from typing and re-typing drafts of documents on manual typewriters to simply entering print commands into word processing software. Finally, the policy of restricting imports of foreign computers was also blamed for causing Brazil to fall far behind in adopting many lifesaving technologies made possible by modern microprocessors, such as anti-lock brakes.[22]

The first post-military-regime president elected by popular suffrage, Fernando Collor de Mello (1990–92), was sworn into office in March 1990.[23] Facing imminent hyperinflation and a virtually bankrupt public sector, the new administration introduced a stabilization plan, together with a set of reforms, aimed at removing restrictions on free enterprise, increasing competition, privatizing public enterprises, and boosting productivity.[23]

Heralded as a definitive blow to inflation, the stabilization plan was drastic.[23] It imposed an eighteen-month freeze on all but a small portion of the private sector's financial assets, froze prices, and again abolished indexation.[23] The new administration also introduced provisional taxes to deal with the fiscal crisis, and took steps to reform the public sector by closing several public agencies and dismissing public servants.[23] These measures were expected not only to swiftly reduce inflation but also to lower inflationary expectations.[23] Collor also implemented a radical liquidity freeze, reducing the money stock by 80% by freezing bank accounts in excess of $1000.[24]

Brazil adopted neoliberalism in the late 1980s, with support from the workers party on the left. Brazil ended the old policy of closed economies with development focused through import substitution industrialization, in favor of a more open economic system and privatization. For example, tariff rates were cut from 32 percent in 1990 to 14 percent in 1994. The market reforms and trade reforms resulted in price stability and faster inflow of capital, but did not change levels of income inequality and poverty.[25]

At first few of the new administration's programs succeeded.[23] Major difficulties with the stabilization and reform programs were caused in part by the superficial nature of many of the administration's actions and by its inability to secure political support.[23] Moreover, the stabilization plan failed because of management errors coupled with defensive actions by segments of society that would be most directly hurt by the plan.[23] Confidence in the government was also eroded as a result of the liquidity freeze combined with an alienated industrial sector who had not been consulted in the plan.[24]

After falling more than 80 percent in March 1990, the CPI's monthly rate of growth began increasing again.[23] The best that could be achieved was to stabilize the CPI at a high and slowly rising level.[23] In January 1991, it rose by 19.9%, reaching 32% a month by July 1993.[23] Simultaneously, political instability increased sharply, with negative impacts on the economy.[23] The real GDP declined 4.0% in 1990, increased only 1.1% in 1991, and again declined 0.9% in 1992.[23]

President Collor de Mello was impeached in September 1992 on charges of corruption.[23] Vice president Itamar Franco was sworn in as president (1992–94), but he had to grapple to form a stable cabinet and to gather political support.[23] The weakness of the interim administration prevented it from tackling inflation effectively.[23] In 1993 the economy grew again, but with inflation rates higher than 30 percent a month, the chances of a durable recovery appeared to be very slim.[23] At the end of the year, it was widely acknowledged that without serious fiscal reform, inflation would remain high and the economy would not sustain growth.[23] This acknowledgment and the pressure of rapidly accelerating inflation finally jolted the government into action.[23] The president appointed a determined minister of finance, Fernando Henrique Cardoso, and a high-level team was put in place to develop a new stabilization plan.[23] Implemented early in 1994, the plan met little public resistance because it was discussed widely and it avoided price freezes.[23]

The stabilization program, called Plano Real had three stages: the introduction of an equilibrium budget mandated by the National Congress a process of general indexation (prices, wages, taxes, contracts, and financial assets); and the introduction of a new currency, the Brazilian real (pegged to the dollar).[23] The legally enforced balanced budget would remove expectations regarding inflationary behavior by the public sector. By allowing a realignment of relative prices, general indexation would pave the way for monetary reform.[23] Once this realignment was achieved, the new currency would be introduced, accompanied by appropriate policies (especially the control of expenditures through high interest rates and the liberalization of trade to increase competition and thus prevent speculative behavior).[23]

By the end of the first quarter of 1994, the second stage of the stabilization plan was being implemented. Economists of different schools of thought considered the plan sound and technically consistent.[23]

Following a boom at the end of the previous decade, Brazil's economy experienced a contraction. Between 2011 and 2015, the value of the real fell from 1.55 reals per US dollar[27] to 4.0 reals.[28] The price of many of the country's main exports fell due to falling demand.[27] From September 2014 to February 2015, Petrobras, the largest energy corporation in Brazil, lost 60% of its market value.[27] Unemployment remained below 6% but began to rise above that in 2015[29] with the economy overall expected to contract by 25% in 2015 in US dollar terms.[30]

• Furtado, Celso. Formação Econômica do Brasil [The Economic Formation of Brazil] (PDF) (in Portuguese).